Regulatory Environment Regulatory Environment and Small-hydro and Small-hydro

DevelopmentDevelopmentProfessor Priyantha D C WijayatungaProfessor Priyantha D C Wijayatunga

Public Utilities Commission of Sri LankaPublic Utilities Commission of Sri Lanka

and University of Moratuwaand University of Moratuwa

Presentation OutlinePresentation Outline

IntroductionIntroductionPublic Utilities Commission of Sri LankaPublic Utilities Commission of Sri LankaRegulatory agency ObjectivesRegulatory agency ObjectivesFunctionsFunctionsFramework for Small-hydro developmentFramework for Small-hydro developmentPolicy and Regulatory interventionsPolicy and Regulatory interventionsFinal remarksFinal remarks

IntroductionIntroduction

Traditionally Policy-making, regulation and Traditionally Policy-making, regulation and operationsoperations Not clearly separatedNot clearly separated

In most cases line-minister regulatesIn most cases line-minister regulates Increasing trend to separate these functionsIncreasing trend to separate these functions

Assist development of the power sectorAssist development of the power sector Also renewable energy industryAlso renewable energy industry

In Sri Lanka Public Utilities Commission In Sri Lanka Public Utilities Commission established to take over regulation of the established to take over regulation of the electricity industryelectricity industry

Public Utilities Commission of Sri LankaPublic Utilities Commission of Sri Lanka

Established under the Public Utilities Established under the Public Utilities Commission of Sri Lanka Act, No. 35 of Commission of Sri Lanka Act, No. 35 of 20022002

A multi-sector regulatory agencyA multi-sector regulatory agencyFirst of that kind in the regionFirst of that kind in the regionElectricity and water industriesElectricity and water industriesDown-stream petroleum industry later Down-stream petroleum industry later

addedaddedNot yet fully empoweredNot yet fully empowered

Public Utilities Commission of Sri Lanka …Public Utilities Commission of Sri Lanka …

Independence ensured throughIndependence ensured throughProcess of appointing and removal of Process of appointing and removal of

membersmembersConstitutional Council and ParliamentConstitutional Council and Parliament

FinancingFinancingLicense feesLicense feesRegulatory leviesRegulatory levies

TransparencyTransparencyStakeholder consultationStakeholder consultationPublication of orders and advice provided to te Publication of orders and advice provided to te

government government Annual report to the parliamentAnnual report to the parliament

Objectives of a Regulatory RegimeObjectives of a Regulatory Regime

Protect the interest of all consumersProtect the interest of all consumersPromote competition where appropriate Promote competition where appropriate

and possibleand possiblePromote efficiency in both the operations Promote efficiency in both the operations

of, and capital investment in public utilities of, and capital investment in public utilities industriesindustries

Promote efficient allocation of resources in Promote efficient allocation of resources in public utilities industriespublic utilities industries

Objectives ….Objectives ….

Promote safety and service qualityPromote safety and service qualityBenchmark utility services against Benchmark utility services against

international standardsinternational standardsEnsure that price controlled entities acting Ensure that price controlled entities acting

efficiently, do not find it unduly difficult in efficiently, do not find it unduly difficult in financing its activitiesfinancing its activities

Eventually leading to investor and Eventually leading to investor and consumer confidence in the utility sectorconsumer confidence in the utility sector

FunctionsFunctions

Advice the Government on industry policy on Advice the Government on industry policy on all matters concerning any industry falling all matters concerning any industry falling within its purviewwithin its purview

Collect, record, analyze and disseminate Collect, record, analyze and disseminate information with an informed opinion, information with an informed opinion, concerning any public utilities industryconcerning any public utilities industry

Exercise licensing, regulatory and inspection Exercise licensing, regulatory and inspection functions functions

Regulate tariffs and other charges levied by Regulate tariffs and other charges levied by regulated entitiesregulated entities

Functions ….Functions ….

Mediation in disputes arising in any public Mediation in disputes arising in any public utility industry utility industry

Set and enforce technical and other Set and enforce technical and other standards relating to safety, quality, standards relating to safety, quality, continuity and reliability of the public utility continuity and reliability of the public utility industries industries

Consult any person or group affected by Consult any person or group affected by its orders when taking it decisionsits orders when taking it decisions

Framework for Small-hydro Framework for Small-hydro DevelopmentDevelopment

Indigenous resource replacing imported fuelsIndigenous resource replacing imported fuels Recognition of avoidance of adverse Recognition of avoidance of adverse

environmental impactsenvironmental impacts Emissions with local impactsEmissions with local impacts Those impacting globally - GHGThose impacting globally - GHG

Recognition ofRecognition of avoidance of high cost generation avoidance of high cost generation National resource as a primary energy sourceNational resource as a primary energy source

RoyaltyRoyalty Benefits flowing to local populationBenefits flowing to local population

Framework for ….Framework for ….

Recognition of pioneering effortsRecognition of pioneering effortsSite allocationSite allocation

Minimum transaction costs encouraging Minimum transaction costs encouraging small investors – large numbersmall investors – large numberStandardised arrangementsStandardised arrangements

Adequate compensation for generation Adequate compensation for generation costs and incentive to operate efficientlycosts and incentive to operate efficiently

Minimum impact on consumer priceMinimum impact on consumer priceBidding for capacity allocation Bidding for capacity allocation

Policy and Regulatory InterventionsPolicy and Regulatory Interventions

Renewable energy portfolio standardsRenewable energy portfolio standardsUtility compelled to achieve given level of Utility compelled to achieve given level of

penetration penetration 10% of supply by NCRE by 201510% of supply by NCRE by 2015Portfolio of technologiesPortfolio of technologies

Additional burden on the utilityAdditional burden on the utilityProvided by the central governmentProvided by the central government

Final Economic impact needs to be justifiedFinal Economic impact needs to be justifiedOr financed through cross-subsidiesOr financed through cross-subsidies

Impact on the final consumer priceImpact on the final consumer price

Policy and Regulatory …..Policy and Regulatory …..

Feed-in tariffsFeed-in tariffsStandardised tariffsStandardised tariffsEncourage all those having costs below feed-Encourage all those having costs below feed-

in tariffin tariff Investment incentivesInvestment incentives

Overcome high investment cost barrierOvercome high investment cost barrier Increased investmentIncreased investmentTax credits on investmentTax credits on investment

Policy and Regulatory …..Policy and Regulatory …..

Production incentivesProduction incentivesAttractive tariffAttractive tariffEfficient operationEfficient operationTax incentives for a given periodTax incentives for a given period

Net-meteringNet-meteringEncourage low cost development and useEncourage low cost development and useEnergy banking Energy banking

Research and developmentResearch and development Incentives for research Incentives for research

Policy and Regulatory …..Policy and Regulatory …..

Competitive biddingCompetitive biddingFor a given allocation within a pre-specified For a given allocation within a pre-specified

penetration levelpenetration levelFor supply priceFor supply priceFor royalty at a given supply priceFor royalty at a given supply price

Pricing MethodologiesPricing Methodologies

Cost based tariffsCost based tariffsTechnology specificTechnology specificCan be project specific or based on a typical Can be project specific or based on a typical

projectprojectCovers costs of the investor including a Covers costs of the investor including a

reasonable rate of returnreasonable rate of returnMay be more than the average cost of May be more than the average cost of

conventional generationconventional generationSubsidies to be determinedSubsidies to be determinedWho pays for subsidies?Who pays for subsidies?

Pricing Methodologies …Pricing Methodologies …

Shadow/opportunity cost based tariffShadow/opportunity cost based tariffAvoided cost in the central generation systemAvoided cost in the central generation systemCredit for avoided environmental cost may be Credit for avoided environmental cost may be

givengivenCan be long-term or short termCan be long-term or short termCan be average or marginalCan be average or marginalTechnology/resource independentTechnology/resource independentConvenient implementation hence low Convenient implementation hence low

transaction coststransaction costs

Pricing Methodologies …Pricing Methodologies …

Efficient low cost projects reap windfall Efficient low cost projects reap windfall profitsprofitsNo adverse impact to the utilityNo adverse impact to the utility Increased investmentIncreased investment

Developers likely to reinvest in other not so Developers likely to reinvest in other not so efficient projectsefficient projects

Pricing Methodologies …Pricing Methodologies …

Fixed price published examining the Fixed price published examining the average generation costaverage generation costNo direct relation to cost of projects or No direct relation to cost of projects or

avoided cost in the central systemavoided cost in the central systemCan be adjusted from time to time depending Can be adjusted from time to time depending

ononthe response of the developersthe response of the developersOr government policyOr government policy

Convenient to implement and hence minimum Convenient to implement and hence minimum transaction coststransaction costs

Implementation StrategyImplementation Strategy Government policy passed down to the regulatorGovernment policy passed down to the regulator

Eg 10% of supply by NCRE by 2015Eg 10% of supply by NCRE by 2015

Regulator implement the policyRegulator implement the policy Licensees ordered to abide by the penetration levelLicensees ordered to abide by the penetration level Flexibility can be left with the utility how to ensure the Flexibility can be left with the utility how to ensure the

level of penetrationlevel of penetration Can be given the parameters such the pricing Can be given the parameters such the pricing

methodology etcmethodology etc Can be a higher level of intervention by even Can be a higher level of intervention by even

approving prices approving prices Direct subsidy or cross-subsidy examined in tariff Direct subsidy or cross-subsidy examined in tariff

determinationdetermination

Final RemarksFinal Remarks Unaccounted benefits of small-hydro needs to Unaccounted benefits of small-hydro needs to

be always considered when making decisionsbe always considered when making decisions Avoided adverse environmental impactsAvoided adverse environmental impacts Socio-economic benefits to the local communitySocio-economic benefits to the local community Indigenous nature of investment Indigenous nature of investment

A separate regulatory agencyA separate regulatory agency Provides a place for all the stakeholders to come for Provides a place for all the stakeholders to come for

their grievancestheir grievances Can mediate for speedy resolution of issues for fast Can mediate for speedy resolution of issues for fast

development of the renewable energy sector development of the renewable energy sector

EndEnd